India: Looking for Investment in a Dhoti-less World

On Friday, September 14, the Indian government officially allowed non-Indian companies to invest in retail, broadcast, and airline industries. While the ceiling of investment percentages differ based on industry- single brand foreign retailers can fully own their stores, multi-brand retailers can own 51 percent and non-Indian airlines can own 49 percent of an Indian airline. Both major Indian companies and foreign corporations have been waiting for this development for some time – for the former, it’s an opportunity to attract investment from heretofore untapped sources while the latter is now able to diversify its holdings and gain a foothold in a market with untapped potential.

This policy move increases India’s participation in the international community and decreases New Delhi’s responsibility for economic stimulus – the hope is investment from the international business community will spur further growth in the slowing Indian economy and improve the country’s crumbling infrastructure. These are major positives but, as with everything, there are some possible negative impacts as well. For example, one reason why Indian banks have been shielded from the impacts of the global banking crisis is their limited exposure to the international market. As international companies increase their investments in India, the exposure of the local banks to global events will also increase and, if there is another financial crash, it’s unclear if the Indian government will be able to financially support its companies at the level of the European and US governments.

I, as a skeptic, remain a little concerned about New Delhi’s statement that the implementation of the new policy has been left entirely to the “decision and discretion” of the state governments. I understand the justification from a political perspective as the central government is notoriously weak. However, giving each state the authority to decide on foreign investment will hamper investment in industries such as airlines and the long-term investment plans of multi brand retailers. Negotiating with each state will be a major headache as each state only negotiates in their native language and India has over 28 states … just imagine all the head shaking!